How does closing a credit card affect your credit score?

Posted by CreditCardGuru

Q: I have a couple cards I no longer use. How will closing a credit card affect your credit score? Will it hurt my credit score?

A: If you’re like most people, you probably have several credit card accounts you have opened over the years, but it’s unlikely that you’re still using all of them on a regular basis. Perhaps a card’s reward program was changed, making it much less lucrative to use. Or maybe the issuer changed the terms and conditions (like slashing your credit limit or raising your APR) and in turn, you have no desire to continue using that card anymore. But do these reasons mean you should be closing your account? Perhaps, but maybe not. Here’s a thorough explanation of exactly how closing a credit card will affect your credit score:

credit scoring factorsLength of credit history
15% of your FICO score is based on length of credit history. According to Fair Isaac, this involves three components listed. However please note that because the FICO formula is secret, no one knows exactly how much weight is given to each factor – all we know is that the following three combined equal 15% of your FICO credit score:

  • Time since account activity
  • Time Since accounts opened
  • Time Since accounts opened, by specific type of account

Now that last bullet is the one I want to point out, because it is talking about how long each specific type of account has been opened. Generally speaking, the longer an account has been opened (and in good standing) the better. But it’s important to note that according to a moderator on MyFico, ”Open and closed accounts age the same. Closing a credit card has no affect on average age of accounts or credit history length.”

Payment history
At 35%, this is the biggest chunk of the pie. There are actually seven different factors that fall under this category, and again, no one knows for sure how much weight is given to each. Many of the factors don’t appear they would apply to this situation (i.e. severity of delinquency, number of past due items on file, etc.) but there are a couple that might be applicable when closing a credit card:

  • Number of accounts paid as agreed
  • Account payment information on specific types of accounts

Based on the first bullet, naturally we can conclude that closing a credit card will mean one less active account. But how many credit cards are too few? No one knows the magic number, and to be honest, it’s probably different for everyone depending on the rest of their credit profile. Therefore, having one less credit card account isn’t necessarily a negative or positive.

The description of the second bullet – account payment information – appears to be rather vague on the Fair Isaac website, so we are limited in what we can extrapolate from that (without just plain old guessing). But it’s probably safe to say that this would include whether or not your payments on your accounts were made on time. If the credit card you want to cancel has a long positive payment history, some prefer to “keep up the good work” on that old account rather than closing it.

Amounts Owed
This is the second biggest chunk of the pie, coming it at 30%. It involves six different factors, but there are couple in particular that I would like to discuss because they would likely be applicable to closing a credit card:

  • Number of accounts with balances
  • Proportion of credit lines used (proportion of balances to total credit limits on certain types of revolving accounts)

Starting with the first bullet, obviously if you close a credit card, that means there is one less active account. If you had a balance on that card, that would mean one less active account with a balance – but this is also something that is not necessarily bad or good.

The second bullet is perhaps the most important factor you should consider for the short term – the effect of closing a credit card on your credit utilization rate  (what percentage of your available credit you use). According to MyFico, there are two parts to the CUR

  1. The extent of utilization on individual revolving lines of credit (credit cards are revolving lines)
  2. The cumulative utilization across all of your revolving lines of credit

As mentioned, the FICO formula is secret so no one knows the magic CUR. However many personal finance experts recommending never having an individual account ever use more than 30% of its credit limit. In fact, many advise not even exceeding 20% or 25%.

When it comes to the ideal cumulative CUR, a moderator on MyFico did give a clue by saying “You will not be punished by simply closing a credit card as long as it is in good standing, has a $0 balance, and your cumulative CUR remains at 1 to 9%.” Assuming that statement is correct, that would mean you want to keep that number below 10%. Therefore closing a credit card could affect your credit score adversely if it raises that number above that threshold.

So to recap, how does closing your credit card affect your credit score? Here are the most important things to consider for the short and long term:

Short term effect on score: The most important factor to consider is its effect on your cumulative credit utilization rate.

Long term effect on score: If you close a credit card account with a zero balance that’s in good standing, generally it will be deleted from your credit report after 10 years. After that account is deleted, “If your length of credit history and/or average age of accounts decreases in the number of years, your scores might drop” according to MyFico.

Conclusion?
There are a lot of misconceptions about whether closing a credit card will hurt your credit score, so it is undoubtedly a confusing subject to say the least – this is why I only used MyFico to gather the above information. Personally, I felt comfortable canceling a couple cards in the past once they started charging annual fees. But for cards that don’t charge annual fees, I just keep them open even if I don’t use them. However what’s best for you and your circumstances may be different than mine.

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2 comments... read them below or add your own

  1. Luciano April 11, 2012 at 10:05AM

    I have 8 credit cards and they are nearly all maxed out ($60,000+). I just negotiated with Chase Bank to lower my payments on four cards by $100.00 per month and reduce my interest rates to 6%.

    However, this will mean that I have to close all four accounts with a note that states “account closed by user.”.

    How will this affect my credit score over the course of six months or so?

    Thank you.

  2. Neil July 17, 2011 at 10:48AM

    All together I have 9 credit cards, 3 of which I use on a daily basis and the other 6 very infrequently to essentially never. I wonder, what is more important: Keeping open or closing a department store card that recently lowered my limit from $1,000 to $200 (I think because I never use it). I’ve had it for over 12 years (my first credit card), but with this new $200 credit limit, I never want to use it, because I don’t want to risk damaging my precious credit utilization ratio. All of my cards are in good standing, and balances are paid off in their entirety every month. Any advice on whether to close or keep open?

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